The Paradox — Why San Diego and California In General Are Terrible Long Term Plays, But Sometimes Golden In the Short Run

So many of you who come here regularly know my professional opinion when it comes to investing in San Diego real estate long term — DON’T. Same goes for the rest of California and the west coast for that matter. Stayin’ away is your best approach.

Why?

The answer is simple, but multi-faceted. I’ll be brief. (Hey! I heard that snicker in the back.)

1. The vast majority of property out west is relatively older. In San Diego, anything built in the 80′s is called newer. If it makes sense to keep a property for the duration numbers wise, but it’s 40-100 at your retirement, your cash flow will suffer noticeably.

2. San Diego’s strong point from the early 70′s till the latest bubble burst was appreciation — reliably so — more than most markets. That be gone, people. I’m too experienced to say forever, but appreciation that matters won’t be around SD for quite awhile. There was no other reason to own property there, even when times were good.

3. We’re now several years into the ‘correction’. San Diego (California in general.) was never a place to buy a home for investment, i.e. for tenants only. The price/rent ratios since 1972 ranged from just plain stoopid to insane. 2-4 units were better, but only relatively, and only when compared to props in SD.

Take a typical duplex here — please.

Before the correction, at the peak, duplexes within a mile or two from my office sold for $525-625,000. And no, not makin’ that up. The rents? Usually $11-1,300/side back then. Even using today’s much lower interest rates, say 5%, the investor had to put 45% down — wait for it — here it comes — to break even. ‘Course the interest was higher then, so figure a minimum of half down — with no cash flow. That was based on a $575,000 price.

Now?

The same duplex (literally) would now sell for roughly $375,000. The rent would be around $1,200/side. That means if you put 25% down you’ll break even at 5% interest. Whoopty Do!

It’s location is mediocre, maybe half a slice better.

It’s freakin’ 60 years old. Rhetorical question: Why do folks buy this crapola?

The majority of these museum pieces have floor plans that have zoomed right past functionally obsolescent to I Love Lucy comic relief. Try no garbage disposals or dishwashers. Kitchens so small, when two people are in ‘em at the same time they better be in love. Most modern one bedrooms sport more square footage than many of these two bedroom dinosaurs. Again, literally.

OK, enough already. I think you get the idea. Long term investment in San Diego and regions like it will deliver a retirement income far short of what’s easily possible in other areas. And with the same amount of capital. It matters not whether you’re using cash or equity — Get . . . Outa . . . Dodge. Preferably around 4:30 yesterday afternoon. Tick Tock.

Short Term

Let’s first establish what ‘short term’ means in clear, unambiguous terms. In the context in which I mean here, it’s less than six months. Usually way less. Invoking the 80/20 rule, I’d say 4-12 weeks is reasonable. Longer than six months? Something hasn’t gone according to plan. Murphy could be in the neighborhood.

Though my resumé includes rehabbing apartments, a medical office building, 2-4 unit properties, and, no kiddin’, a rooming house, I’m not the guy to call for the buy/rehab/sell for unconscionable profit strategy. Although I harbor great respect and admiration for those who pull that off consistently, with the exception of the examples above, I’ve always thought that segment of the real estate investment universe was/is sorely misunderstood in terms of risk.

Way misunderstood, as in, many went into it thinkin’ their risk was far below what it was in real life. That is until real life sucked the spirits from their souls. But the public doesn’t hear much about those folks.

I like SoCal for short term profit.

That said, I prefer (Read: Will at all costs.) to avoid properties in need of fixing. Since no plan for short term real estate profits ever works 100% of the time, assessing risk with professional accuracy is the linchpin to its success. (Notice I said short term. Long term is much more reliably subject to solid gold fundamentals — what I call the physics of economics. Short term stuff is more, “Buy low, sell high” in nature, and relies almost exclusively on the investor’s ability to accurately KNOW both the low and the high. Far more difficult than most suspect.)

Since even conservative short term real estate investing brings risk to the table (duh), compression of that intrinsic risk can be found in the details. Maybe the most common mistake made in short term agendas is sacrificing location quality standards. This is almost always due to the investor’s thinking that since they’re only gonna be there a very short time, location quality becomes less critical, or has less impact on their success. After all, “I’m not gonna be the one left holdin’ the bag, so why worry about it?” In my office we call that utterance, famous last words.

Insisting on no rehabbing required, at worst superficially light, cosmetic fixing, will also reduce your risk. Don’t play head games with yourself on this one. “Heck, it only needs a ‘quick’ kitchen remodel”. Believe me when I tell ya, that’s an oxymoronic sentence if there ever was one. Ever come across an anthill with two ants? Me neither. There’s ALWAYS more. Learn to say ‘Pass’, and go to the next one.

Having built-in buyers for market price is good if you can make it happen. Talk about compressing risk. That goes a long way. But even then, like the bumper sticker says, ‘Things Happen’, or something to that effect.

Risk can be reduced incrementally in many ways when investing for short term profits. I’ll be puttin’ groups together to spread that risk around pretty soon. One of my motivations is to provide a vehicle for long term investment clients who would like to increase the velocity of their Purposeful Plans for long term retirement, but don’t like going down that road alone, without an expert at the helm.

The San Diego market, and those like it, are indeed a paradox. Long term investment do not and will not go well there, while short term investment attached to reduced risk is doing well, and should continue to for the next 2-5 years.

Next up: How to combine long term real estate investing for retirement synergistically with short term strategies. This adds a page to your options menu that can serve to not only hasten your final day at work, but increase your ultimate retirement income too.

Stay tuned.

Meanwhile, back at BawldGuy Ranch, operators are waitin’ with bated breath for your call. 619 889-7100 will get us talkin’ about how to get your retirement headed in the right direction. Or you can send me a note by clickin’ on the Contact BawldGuy button up top. Have a good one.

Related posts:

1. The Short Term – Long Term – And End Game
2. Real Estate Investors – Create Synergy Between Short and Long Term Investing – A Projected Case Study
3. The Age Old Tug of War Between Schools of Thought – Long Term Real Estate Investing
4. Stocks vs Real Estate — Both Down Now — Long Term? RE Still Easy Winner
5. Wishin’ & Hopin’ Ain’t Gonna Get It San Diego (California) Real Estate Investors